UK Pensions Opt for Independence Over Buy-Out

A survey by Aon Hewitt suggests that pension insurers may have to fish in smaller ponds to attract buy-out business.

The majority of large UK pensions want to become self-sufficient rather than offload liabilities to an insurer, according to a survey by Aon Hewitt.

The survey of 220 UK defined benefit pensions found that just 8% of funds larger than £1 billion ($1.6 billion) were targeting a full buy-out as their long-term goal.

In contrast, 63% said they wanted to become self-sufficient once they had reached fully-funded status.

Source: Aon HewittSource: Aon HewittWhen questioned on investment strategy, 46% of pensions of all sizes said they were seeking to increase their exposure to liability-driven investment (LDI) strategies. Linked to this, more than a third (36%) of pensions expressed a desire to increase holdings in index-linked government bonds. Alternative investments were also popular, with 37% of funds keen to grow their allocations.

In contrast, 47% said they planned to cut exposure to UK equity, and 40% said they would reduce overseas equity.

“Despite the historically low levels of gilt yields, there is no sign of pension schemes becoming significant sellers of gilts or corporate bonds,” Aon Hewitt’s report said. “More than half the respondents who had reduced their exposure to index-linked gilts had increased their allocation to LDI, suggesting that they have done so in an attempt to get a better hedging portfolio for their liabilities, rather than actually to reduce their holdings of matching assets.”

However, pension funds’ planned endgames may be further away than hoped: The survey’s results came as new data on UK pension deficits from Mercer showed a 17% jump in shortfalls during July.

Data from FTSE 350-listed company pension funds showed the aggregate deficit rose from £81 billion to £95 billion during the month. While collectively assets rose by 1.4% in July, liabilities grew by 3.3%.

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